COMMENT:

I am already in a retirement scheme into which my employer, the Ministry of Education, is paying a contribution. I am in the 60 to 64 age bracket. If I join KiwiSaver, can I still get the money from the Government over the five-year lock-in period?

Yes. And we'll look more at your specific situation in a minute.

But first, here's a message for everyone aged 60 to 64 who isn't in KiwiSaver. Join before July 1 and you'll get up to $2605 from the Government — plus employer contributions if you are an employee. Muck around and you'll get less.

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Readers who know people in this situation might want to alert them, as I haven't seen this pointed out by anyone else.

There are some Ts and Cs, of course. But let's start with the basics. From July 1, two KiwiSaver changes take effect:

• People over 65 can join KiwiSaver. They won't get any tax credits, now called "government contributions". And there won't be any compulsory employer contributions — although the Government says 80 per cent of employers currently contribute to employees over 65, so I suppose most employers will also contribute to new joiners.
I strongly suggest 65-plus people consider joining KiwiSaver as a place to park some of your retirement savings. There's a wide range of investments, lots of info about them, and generally lower fees than in non-KiwiSaver funds.

• The five-year lock-in for people who join KiwiSaver between 60 and 64 ends.
Until July 1, the savings of anyone who joins in that age group are locked up until you have been in the scheme for five years — even though you will have reached 65 in the meantime.

But the good part is that throughout those five years you get compulsory employer contributions and the government contributions — 50 cents for every dollar you put in, up to $521 if you contribute $1042 or more. For example, if you join at 64, you get those contributions until you're 69.

When the lock-in ends, from July 1, the five years of contributions end too. People in their early-60s who join after that date will see the contributions stop at 65, just as they do for everyone else.

What it all means:

• A person who is turning 62 and joins now can get up to $2605 — five years of $521 — from the Government. But if they join after July 1, they get only three years' worth — up to $1563.

• A person who is about to turn 65 and joins now can also get up to $2605. But if they join after July 1, they get no government contributions.

• For employees who join now there will also be more years of compulsory employer contributions.

• You will, of course, have to contribute to KiwiSaver to get the money. For employees it will be 3 per cent of pay for at least a year, but after that you can take a contributions holiday, now called a "savings suspension", if you wish. Non-employees and employees on a savings suspension should contribute $20 a week, or $87 a month, or $1042 a year to get the full $521 from the Government. It's best to set up an automatic transfer from your bank account.

What if your circumstances change? It's worth raiding your savings to keep contributing. If you can't afford even that, you can put in nothing — but you miss the benefits.

Also, the lock-in of your money has been softened. In a little publicised change, the Government has said that from April 2020, anyone in a five-year lock-in will have the option of gaining access to their money at any time after they turn 65.

If you take up that option, you lose the government contributions and compulsory employer contributions from that date. But it gives you flexibility if, for example, you decide to retire earlier than you had planned.

Okay, now turning to our reader. You can be in KiwiSaver as well as your other scheme, but your employer won't contribute to both.

In your first year you'll have to put at least 3 per cent of your pay into KiwiSaver — in addition to your contributions to the other scheme — and you'll get the KiwiSaver government contribution.

If that proves too hard, after your first year you can take a savings suspension.

The maximum suspension period is now one year instead of five years, but you can easily renew it every year. While you're on the suspension, you're like the people in the fourth bullet point above. Try to put in $1042 a year.

Unsure which fund to join? Use the KiwiSaver Fund Finder on sorted.org.nz. First, find the right type of fund for you. Then compare all funds of that type. I suggest you go for the ones with the lowest fees.

Same difference

For couples, is it better to sink all your KiwiSaver contributions into one "pooled" investment or split 50:50?

Obviously, we both have to contribute to KiwiSaver, but from a total household budget standpoint I was wondering if it is better to put as much as you can into one KiwiSaver account and only the bare minimum into the other. That way you build up funds quicker than you would if you split the funds 50:50. Just thinking about how compound interest works.

This is the same principle as the recent letter about putting $75 a week into each child's KiwiSaver account versus putting the lot into one parent's account. I've received a few letters about this, so let's try to make it clear.

It doesn't make any difference to your total savings whether you put it all in one account or spread the money around. Each dollar earns the same return, regardless of whether it's joined by lots of other dollars or only a few.

To show this, we'll do a few sums. Those who find this a bit much of a challenge on a Saturday morning can skip to the end!

Let's say you each have a balance of $1000, you each contribute $100 a year, and the return is 10 per cent, paid at the end of each year.

Scenario 1: You each keep contributing to your own account.

Each balance will be $1100 at the end of the first year, plus a return of $110, which comes to $1210.

At the end of the second year it will be $1310 plus a return of $131, which comes to $1441. At the end of the third year it will be $1541 plus a return of $154.10, which comes to $1695.10. Multiply by two for your two accounts, and you have $3390.20.

Scenario 2: You leave one account at $1000, and make all contributions to the other.

The first account will earn a return of $100 in the first year, so it will total $1100. In the second year it will grow to $1210, and in the third year it will grow to $1331.

Meanwhile, the second account will grow to $1200 at the end of the first year, plus a return of $120, which comes to $1320.

At the end of the second year it will be $1520 plus a return of $152, which comes to $1672. At the end of the third year it will be $1872 plus a return of $187.20, which comes to $2059.20.

The total for the two accounts is $3390.20 — the same as in the first scenario. And that will continue to apply for as many years as you like.

Lower tax benefit

A recent reader questioned if they should contribute to their own KiwiSaver accounts or their kids'.

It's important to also consider the lower tax rate the kids are likely to pay, and therefore they'll get higher net income and faster growth.

The kids are likely to be eligible for the 10.5 per cent PIR, while the parents could be on 17.5 or 28 per cent.

Thanks. Yes, a lower tax rate can make quite a difference over the years.

Savings challenge

To further the discussion on KiwiSaver for children, I would like to add the following points:

• Under the age of 18 years they do not receive the Government payment.
• They pay tax on their investment.
• They are charged full fees by the provider.

As such, these children's accounts can end up with a lower balance by the end of each financial year.

It's pretty hard explaining to our teenagers that they need to save for the future (house buying and retirement), but all they can see is their savings being eroded by taxes and fees.

The KiwiSaver balances of both children and adults may fall in years when markets fall.

But it's true that a child's balance is more likely to decrease because, as you say, they don't get the government contribution. What's more, many are making no or only small contributions of their own.

It's also true that children pay tax, although at a lower rate, as noted above.
However, you're not quite right about fees.

Most providers charge kids the same as their parents. And most fees include a fixed charge, which hits people with low balances harder. A $30 fee dents a $500 balance much more than a $50,000 balance.

But there are exceptions. The Commission for Financial Capability reports that, as of last October:

• Juno charges no fees for under-18s.
• Craigs and Simplicity waive the annual admin fee, so they charge just a percentage, which will be low on a small balance.
• NZ Funds also waives the admin fee, as long as contributions total $200 or more.
• Aon slightly reduces its annual fee for under-18s.

These providers no doubt hope to keep child members when they grow up, and fair enough too — although of course everyone is free to change provider whenever they want to.

All in all, KiwiSaver isn't as good for children since the $1000 kickstart ceased. Still, I think it's worthwhile to sign up your kids in a fund that charges low fees either for children or for everyone.

Once they get a job — perhaps part-time — they will make contributions, and that can set up a lifetime habit. Meanwhile, they are learning about how markets work.

Calculating gain

I think you missed the question from a correspondent last week. He was asking if he would have to pay capital gains tax on the capital increase from when he bought his property 30 or 40 years ago until now.

My understanding is if a CGT comes in as proposed, he would need to obtain a value of the property in 2021, and then would be paying tax on any gain following that, not from when he purchased the property in, say, 1990.

And then CGT would only be applicable if the property is sold. Your answer seemed to imply CGT would be based on gain since original purchase.

Your understanding is correct.

But I thought the correspondent was just pointing out how much his property value has grown in the past, and adding that if you owned a property for many years in the future, there would be a similar big gain.

Anyway, in case others were confused, the proposed CGT would be only on gains since 2021 — or whenever the tax starts, if it does start at all.

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her latest book is Rich Enough? A Laid-back Guide for Every Kiwi, and her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.